Write-down definition
/What is a Write-Down?
A write-down occurs when a business reduces the carrying amount of an asset, other than through normal depreciation and amortization. A write-down is normally done when the market value of an asset declines below its current carrying amount. The entire amount of the write-down charge appears on the income statement, while the reduced carrying amount of the asset appears on the balance sheet. A write-down is a non-cash expense, since there is no associated outflow of cash when a write-down is taken.
Related AccountingTools Courses
When to Take a Write-Down
A write-down should be taken as soon as management is aware that the market value of an asset has fallen; they are not supposed to delay this recognition, as often happens when a company wants to manage its earnings.
The Difference Between a Write-Down and a Write-Off
In a write-down, the carrying amount of an asset is reduced in a firm’s accounting records to some lesser amount. In a write-off, the entire remaining balance of the asset is reduced to zero.
Example of a Write-Down
Dude Skis manufacturers 10,000 fat powder skis for the upcoming ski season, each of which costs it $200 to produce. In total, this inventory has a book value of $2,000,000. However, many distributors elect to purchase skis made by Sahara Skis, which are selling for $100 less than what Dude is offering. Sahara ends up blocking Dude from most of the market. By the end of the selling season, which is January, Dude still has 7,000 fat powder skis in inventory. Dude’s accountant concludes that the remaining skis can be sold off in other markets for $125 each, which represents a loss of $75 on each of the 7,000 skis, for a total loss of $525,000.
Accordingly, the accountant writes down the carrying amount of the remaining ski inventory by $525,000. This entry flows through the income statement and balance sheet. On the income statement, the cost of goods sold is increased by $525,000, while the inventory line item on the balance sheet is reduced by $525,000.
The end result of this write-down exercise is that Dude Skis has matched the recorded value of its ski inventory to what they can actually be sold for on the market.